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Social Security and AARP There is a lot in the press and in Washington concerning the Social Security system. President Bush has made reform of the system one of his keys for his domestic agenda. One of the principal aspects of what the President is expected to propose is private accounts for individuals. The American Association of Retired Persons has come out strongly against private accounts. They have started a campaign urging their members to write their representatives and senators opposing private accounts. The theme is not to make Social Security social insecurity. The problem with the approach of the AARP is that it primarily involves scaring seniors into action, rather than trying to provide meaningful information. Social Security is a system which by all accounts - including official reports from the Social Security Administration - will be facing worsening financial circumstances beginning in 10 to 15 years. The system will not run out of money that soon, but benefits will start exceeding receipts in that time. This prospect is a problem because, given current demographics, benefit structures and tax structures, the degrading financial condition will continue and is not likely to be reversed before the "trust fund" is broke. But there is another subtle aspect to the problem of outflow exceeding inflow, namely the impact upon the rest of the financial strength of the United States. The Social Security fund really is not an investment fund. The fund has debt instruments of the Federal government. Because of the low return, this mechanism provides a cheap and, until a few years from now, a dependable means of borrowing for the Federal government. Once outflow exceeds income, the difference will need to be made up by borrowing outside the fund, which will be at higher rates, or income will need to be improved by raising taxes. Either of these approaches will impose a heavier burden on future generations which may not be needed. The use of private accounts has been lauded by others besides the President. Many economists believe that such accounts will provide a more secure retirement to participants rather than less security. All of the proposals for private accounts have two things in common. At least one-half of the taxes will continue to be paid into the Social Security system with no more than one-half of the taxes being diverted to private accounts. A person who chooses to divert some taxes to a private account voluntarily elects not to receive Social Security benefits upon retirement. Had this option been available to me, I would have taken it without any questions asked. A proposal by the CATO Institute has another aspect which would cause me to choose a private account even now though I am less than six years away from Social Security. That aspect is that the prior contributions of the employee's portion of taxes would be distributed to the individual as a government bond with interest. Some economists have looked back at stock market history, including during the depression. Even with the depression, is Social Security had been in place, the stock market has out performed the Social Security system to such an extent that any person retiring in almost any year over the last 50 years would have been in a better position with private accounts than with Social Security. The AARP claims on its web site to have positive suggestions about saving Social Security. In fact the supposed suggestions are merely brief statements that the Social Security system is not in as bad a shape as some would suggest. The first item is that the trust fund is a sure thing, but the brief detail indicates that it is only a sure thing for the next 20 to 30 years. Even then it is admitted that there will be a problem, and that the problem begins to emerge in the next few years. The second point is that it is not the first time the government would issue bonds to make important payments, an admission of the funding problem I mention above of what will happen when the outflow begins to exceed the inflow. The third point is that we can close the gap in the trust fund, but there is no indication of how that can be done, possibly because the choices are not very pleasant. The ways to close the gap are to increase taxes, decrease benefits, delay retirement or a combination of all three. In short, the AARP's position is strong on rhetoric and short on substance. In my view, this is not unusual for the AARP. If you take a trip around the organization's web site, it has a lot of member benefits and advertising. My experience with member benefits is that often the benefits are not as good as what can be purchased separately, but they often are cheaper. Also, the sponsoring organization gets a kickback. Looking at this and viewing the work of the AARP in Washington, I come away with the conclusion that the AARP is primarily a marketing organization which is short on substantive help for members and long on making money for the organization. It would be much better to have an honest discussion of what is needed for Social Security than to have an organization which is supposed to help and to represent seniors participating in unsubstantiated scare tactics. |
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